'Lifestyle' Investing: A New Path to Successful Retirement

Many people put too much money in the wrong investments, which places them in danger of outliving their money

by Erin Botsford • Next Avenue

Photograph: Shutterstock

Most people have retirement planning all wrong. They think it’s about accumulating enough to reach a “magic number” on a balance sheet, or proper asset allocation for their investments, or knowing exactly how much of their savings to withdraw so they’ll have enough income to live on. After all, experts have preached those messages for decades.

Whether you are retired or getting ready to retire, it's important that you learn how to match your investments to the cash flow you will need. Rather than focusing on a “magic number,” which can go poof in a bad market, you should create an investment portfolio that reflects the reality of your lifestyle. Here’s how: Your House of Security First, you have to design your House of Security. A house begins with a foundation, and in this case that's your basic retirement needs — the elements of a reasonable lifestyle. They include food, shelter, health insurance, utilities and other essentials. Now project how much annual cash flow you will need to sustain those essentials in retirement. Let’s say the number is $50,000. Then estimate how much you’ll receive annually from income you can count on, such as pensions and Social Security. Let’s say that’s $30,000. In that case, the difference between your basic needs and this expected income would be $20,000.